FSM Petroleum Corporation now responsible to fuel FSM's future

Palikir, POHNPEI (FSM Information Services): March 24, 2008 - The way is now clear for the FSM Petroleum Corporation to take over responsibility for fuel supply in the Federated States of Micronesia.

This follows the March 18 2008 signing by Pohnpei State Governor John Ehsa of various legal documents that authorize Pohnpei' State's participation in the FSM Petroleum Corporation.

Under the new fuel corporation consumers can expect to see a lower relative fuel price and more competitive fuel supply arrangements than they would have with MOMI under the previous fuel supply arrangements in FSM.

Long-term fuels supply options for the FSM had been under consideration since 2005 by an FSM Task Force headed by Vice President Redley Killion. However, with increased concern over escalating fuel prices and about MOMI's long-term commitment to the FSM market, upon taking Office in May 2007, President Manny Mori appointed former FSM Congress Speaker Peter Christian as chairman of the Task Force and mandated the Task Force to reach a satisfactory resolution of FSM's future fuel supply within 2007. Agreement to transfer MOMI assets in FSM to the FSM Government and for MOMI to maintain fuel supply for a transitional five-year period was substantially, and amicably, agreed between the two parties by August 2007.

Following the negotiations the FSM Petroleum Corporation was established by the FSM Congress and signed into law by President Manny Mori on September 11, 2007. The FSM Petroleum Corporation will do business under the trade name of "PetroCorp". It will acquire and operate the state fuel storage and wholesale distribution facilities in Yap, Chuuk and Pohnpei State that are currently owned by Mobil Oil Micronesia, Inc. It will also negotiate with the State of Kosrae for the fuel storage facility there owned by Micronesia Petroleum Corporation.

Under the national fuel supply plan each state will benefit more from higher economies of scale, shipping efficiencies and leveraged purchasing power, than by going on their own. Accordingly, activation of the new corporation and fuel supply arrangements required the endorsement of all four states. This was delayed while Pohnpei State Government looked at possible alternative supply options and an assessment by the new State administration and Legislature in Pohnpei has now concluded that the national fuel supply plan based on the FSM Petroleum Corporation offers Pohnpei State greater supply security and overall pricing assurances.

Financing for PetroCorp to acquire MOMI's fuel storage and local delivery assets will be obtained by a $9.74M loan from the Bank of Guam that will be secured by the assets of the corporation and a Guaranty by GFSM. In order to finalize transfer of the MOMI assets to PetroCorp the state governments are expected to arrange for the transfer and extension of the leases for the sites where the bulk facilities are located.

Following concerns raised by Pohnpei State, the FSM National Government will indemnify the state governments against possible legal liabilities resulting from oil spills, accidents and other damages. The FSM Government will in turn receive back-to-back indemnifications from the FSM Petroleum Corporation, which the corporation will secure through appropriate insurance coverage.

PetroCorp is expected to formally commence operations toward the end of May 2008, after land lease assignments to the new corporation are completed. Current management responsibility for PetroCorp is vested in a transitional board whose term expires at the end of March 2008. The regular board will be comprised of one representative from each of the five FSM governments, and two persons selected from the FSM private sector, who do not have any direct conflict of interest.

PetroCorp will be run on strict commercial lines with a high level of transparency in its pricing and supply arrangements. Each state operation will be run as a distinct accounting unit. PetroCorp will retain all current local employees of MOMI, and once operational the corporation will work to strengthen business relationships and support to the retail fuel operators in the areas of safety, training, supply reliability and product quality.

PetroCorp will source its fuel supplies exclusively from MOMI and receive technical support services for the next five years as part of the deal to acquire MOMI's fuel facilities, and to ensure a secure and reliable supply of energy under the new arrangement. The pricing of that fuel will be on new bulk terms, on an arms-length C&F basis delivered at dockside.

PetroCorp expects to be able to offer FSM consumers better fuel supply arrangements than under MOMI's current fuel supply arrangement in FSM by utilizing lower cost of capital and a longer-term perspective for investment recovery, and by maintaining a lower overhead and a more appropriate revenue mark-up margin.

Domestic petroleum prices will be based on a pricing template that adjusts local wholesale prices (the Terminal Gate Price) in FSM according to the changes in world fuel prices that affect each delivery of fuel from the overseas bulk supplier. This is similar to what MOMI does at present. Given the constant upward movement of world oil prices, FSM consumers could still see local retail fuel prices rise higher than current rates, but it should be realized that those prices would be even higher under the current MOMI fuel pricing arrangement.

PetroCorp recognizes the importance of fuel to the economic and social development of the nation. It has therefore committed to be pro-actively engaged to ensure that its pricing mechanism is supportive of the economic objectives of the State and National Governments. Where requested by a state, PetroCorp could adopt appropriate product-pricing policies across sectors. It would however also ensure that all prices to all customers are made known in a public manner, consistent with its overall commitment to transparency in its transactions.